4 Different approaches to fraud risk assessment and their implication on audit planning
4.2 The system of external auditing in Hungary
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9. Figure Regulation of auditing in Hungary (Füredi-Fülöp, 2015)
The Association of Hungarian Auditors was established in 1987 after re-introducing the market economy in Hungary. The Act VI of 1988 made the free choice of auditor available for business associations and specified the responsibilities, rights and obligations of auditors. The Chamber of Hungarian Auditors (Magyar Könyvvizsgálói Kamara) was founded in 1997. In the same year audit obligation was officially imposed on Hungarian business associations by the Act CXLIV of 1997 on Business Associations. This act prescribed an external, independent and standardized audit to be conducted for the involved business associations.
The formation of the Chamber of Hungarian Auditors opened the new and modern era of the Hungarian audit profession. The Chamber became member of IFAC (International Federation of Accountants) in 1992 and of FEE (Fédération des Experts-comptables – Federation of European Accountants) in 2002.
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From 2001 the Hungarian National Auditing and Quality Assurance Standards are in full compliance with the ISAs (International Standards on Auditing).
The Act of 2000 C on Accounting defines the objective of auditing as giving an assurance that the financial statements of the business association were prepared in accordance with the prevailing standards and as a consequence they show the fair and true view of the business association’s financial performance and position.
External audit is mandatory for all business associations that are registered in Hungary and pursuing a double-entry bookkeeping system unless they qualify for exemption. Business association who meet both of the following conditions are exempt from the mandatory external audit:
- in two consequitve business years before the actual year the average annual net sales revenue did not exceed 300 million HUF and;
- in two consequitve business years before the actual year the average number of employees employed by the business association did not exceed 50.
It is important to note that despite the fact that a business association complies with the above conditions and qualifies for the exemption it cannot get the exemption if it had a higher than 10 million HUF public debt which was due over 60 days at the end of the previous fiscal year.
For the following business associations audit is always mandatory:
- those business associations which are leading double-entry bookkeeping system and mandatory audit is prescribed by an act or regulation,
- saving associations,
- business associations involved in consolidation,
62 - Hungarian branch of foreign business associations, - business association subject to public interest,
- those business associations that in their bookkeeping and accounting system divert from regulations given by the Act on Accounting for the purpose of supporting true and fair view.
For public and private limited companies external audit is primarily mandatory but these business association also have the possibility to get exemption.
Based on Act of 2007 LXXV on “the Chamber of Hungarian Auditors, on audit services and on the supervisory of audit services” audit service can only be provided by that private individual who has acquired the chartered auditor qualification issued by the Chamber of Hungarian Auditors and completed successfully the professional competence exams. A private individual can pursue audit service in Hungary only if this individual is member of the Chamber of Hungarian Auditors and acquired the audit license.
The active and inactive number of members of the Chamber of Hungarian auditors between 2010 and 2015 are presented in Table 1. We can observe a slow, but continuous decrease both in the number of members and also the number of audit reports issued over the period covered between 2010 and 2015.
1. Table The number of members of the Chamber of Hungarian Auditors 2010 – 201515
2010 2011 2012 2013 2014 2015
Active members 3 376 3 296 3 141 3 030 2 931 2 831
Inactive members 2 317 2 318 2 313 2 317 2 270 2 199
Total 5 693 5 614 5 454 5 347 5 201 5 030
Number of association conducting audit services 1 929 1 922 1 871 1 861 1 828 1 735 Number of audit reports issued 44 723 42 499 35 242 33 124 30 483 27 710 Revenue from audit activity (million HUF) 33 271.9 33 411.2 31 285.1 30 700.2 29 706.7 29 489,2 Revenue / report issued (HUF / report) 743 955 786 165 887 722 926 826 974 532 1 064 207
15Source: based on direct query from the Chamber of Hungarian Auditors
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Between 2008 and 2013 the Public Oversight Committee of Auditors were responsible for the supervision of auditors and the operation of the Chamber. The foundations of an independent quality control system of auditors that are providing audit service for business associations which are subject to public interest were established in this period. From 1 July 2013 this supervision belongs to the Ministry for National Economy and the Public Oversight Board of Auditors was established as a subset of the Ministry.
In the following cases extraordinary quality control procedures might also be conducted:
- if it is initiated by the disciplinary committee of the Chamber, - if it is required by a member of the Chamber as a self control, - if it is initiated by the Public Oversight Board of Auditors.
2. Table Number of Quality control procedures conducted by the Public Oversight Board of Auditors16
2013 2014 2015
Individual auditors
Passed 31 10 10
Passed with remark 4 1 2
Failed 3 7 8
Total 38 18 20
Audit firms
Passed 15 4 4
Passed with remark 3 1 0
Failed 1 3 1
Total 19 8 5
Table 2 show the activity of the Public Oversight Board of Auditors in the period between 2013 and 2015.
The Hungarian Chamber of Auditors also has a Quality Control Committee which primary objective is to operate a quality control system. The purpose of the quality control system is to
16Source: based on direct query from the Chamber of Hungarian Auditors
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improve the quality of the audit work performed by auditors and as a consequence to strengthen the credibility of the audit opinion issued by auditors and to improve the prestige of the profession as a whole. Individual auditors and audit firms are regularly controlled whether they comply with the Hungarian National Auditing Standards and with their internal quality standards in their audit engagements. And finally, based on ISA 22017 auditors and audit firms are also obliged to draw up and operate a quality assurance system with a quality assurance policy.